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Following numerous turns in Facebook’s plans to enter the digital payments market, the technology company is now launching a pilot for its digital wallet with Paxos stablecoin, but the move has sparked opposition from Democratic senators.
On Tuesday (October 19), Facebook announced the rollout of its digital wallet app called Novi in Guatemala and most of the U.S. states to provide instant cross-border payments without any fees.
Despite originally planning to use its own digital currency Diem, the company decided to pilot the service using Paxos’ USDP stablecoins. This will enable users to send money within the U.S. or to Guatemala in USDP and withdraw their money in the local currency.
Although the pilot currently uses the Paxos stablecoin, Facebook intends to migrate Novi to the Diem payment network, once it receives regulatory approval.
“The goal for Novi has been and always will be to be interoperable with other digital wallets and we believe a purpose-built blockchain for payments, like Diem, is critical to deliver solutions to the problems that people experience with the current payment system,” David Marcus, head of Novi, said in the announcement.
In addition to Paxos, Facebook has teamed up with crypto-exchange Coinbase that provides custody solutions for the storage of customer funds in Novi.
The announcement stresses that Novi has “important regulatory and consumer protection attributes” and that privacy is “top of mind” for Novi.
Despite these assurances, the move has provoked opposition from several Democratic senators, including Banking Committee chair Sherrod Brown (D-OH) and Elizabeth Warren (D-MA), a champion of consumer financial protection.
“Given the scope of the scandals surrounding your company, we write to voice our strongest opposition to Facebook’s revived effort to launch a cryptocurrency and digital wallet, now branded 'Diem' and 'Novi,' respectively,” the senators wrote in a letter to Mark Zuckerberg.
“Facebook is once again pursuing digital currency plans on an aggressive timeline and has already launched a pilot for a payments infrastructure network, even though these plans are incompatible with the actual financial regulatory landscape — not only for Diem specifically, but also for stablecoins in general,” they said.
Although Marcus has previously stated that Facebook has secured licenses or approvals for Novi in nearly every state, the letter warned the company that the ability to secure state-issued money transmitter licenses “is not equivalent to obtaining the blessing of 'all U.S. regulators.'”
Concluding that “Facebook cannot be trusted to manage a payment system or digital currency,” lawmakers ask Facebook “to immediately discontinue your Novi pilot and to commit that you will not bring Diem to market.”
In response to the letter, the Diem Association issued a release, stating that the lawmakers “misunderstand the relationship between Diem and Facebook.”
“Diem is not Facebook. We are an independent organization, and Facebook’s Novi is just one of more than two dozen members of the Diem Association,” they emphasized.
Re-calibration
This is not the first time Facebook and the Diem Association have had to revisit their plans over the launch of the digital currency and the digital wallet.
The Diem Association, formerly called the Libra Association, decided to rebrand itself last December, particularly with a view to distancing itself from Facebook, while Facebook rebranded its digital wallet project Calibra to Novi earlier that May.
After the first attempts to launch Libra in the U.S. faced significant regulatory headwinds, last year, Facebook decided to pursue a payments license in Switzerland. However, in May, Facebook announced that it had abandoned its Swiss license application and turned again to the U.S., pointing as a reason to the evolving digital currency regulatory environment in the North American country.
Throughout the years, the Libra/Diem project has also gone through significant changes. The original vision of Libra was a single global stablecoin with a value pegged to a “basket” of fiat currencies; however, in its Swiss application Facebook proposed a variety of single-currency stablecoins, as well as a global variant.
Later when it announced plans to move back to the U.S., the company said it would focus only on a U.S. dollar-backed stablecoin.
Use of crypto in payments
When Facebook announced Libra two years ago, it was a watershed moment in terms of the cryptocurrency space, Ari Redbord, head of legal and government affairs at TRM Labs, told VIXIO.
The project got the attention of global regulators given the broad reach of Facebook and the other companies involved, who really focused on understanding the promise and challenges of the digital asset space.
“I think over the last two years, Diem and Novi have worked closely with regulators to try to best understand the expectations around launching a product,” Redbord said.
“Yesterday's news around Novi speaks to Facebook continuing to be deliberative and shows a focus on one extraordinary use case for crypto — remittances and the promise of being able to send funds quickly and securely without financial intermediaries,” he explained.
By offering instant and free cross-border remittances, Novi is clearly trying to tap into a use case that will likely be in high demand among many Facebook users. If successful, it could fundamentally disrupt cross-border remittance payments.
Guatemala also represents an ideal market for the pilot. According to World Bank data, Guatemala was the sixth largest destination for outbound remittance from the U.S., totalling $7.7bn in 2017. However, the regulatory challenge that Novi is facing remains significant and one that will likely be hard to overcome in the short term.
